An online provider’s termination of a user’s online account can be a major-and potentially even life-changing-event for the user. Account termination exiles the user from a virtual place the user wanted to be; termination disrupts any social network relationship ties in that venue, and prevents the user from sending or receiving messages there; and the user loses any virtual assets in the account, which could be anything from archived emails to accumulated game assets. The effects of account termination are especially acute in virtual worlds, where dedicated users may be spending a majority of their waking hours or have aggregated substantial in-game wealth. However, the problem arises in all online environments (including email, social networking and web hosting) where account termination disrupts investments made by users.

Because of the potentially significant consequences from online user account termination, user-rights advocates, especially in the virtual world context, have sought legal restrictions on online providers’ discretion to terminate users. However, these efforts are largely misdirected because of 47 U.S.C. §230(c)(2) (“Section 230(c)(2)”), a federal statutory immunity. This essay, written in conjunction with an April 2011 symposium at UC Irvine entitled “Governing the Magic Circle: Regulation of Virtual Worlds,” explains Section 230(c)(2)’s role in immunizing online providers’ decisions to terminate user accounts. It also explains why this immunity is sound policy.

But the meat of the essay (at least the normative part of the essay) is this:

Online user communities inevitably require at least some provider intervention. At times, users need “protection” from other users. The provider can give users self-help tools to reduce their reliance on the online provider’s intervention, but technological tools cannot ameliorate all community-damaging conduct by determined users. Eventually, the online provider needs to curb a rogue user’s behavior to protect the rest of the community. Alternatively, a provider may need to respond to users who are jeopardizing the site’s security or technical infrastructure. . . . Section 230(c)(2) provides substantial legal certainty to online providers who police their premises and ensure the community’s stability when intervention is necessary.

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Thus, marketplace incentives work unexpectedly well to discipline online providers from capriciously wielding their termination power. This is true even if many users face substantial nonrecoupable or switching costs, both financially and in terms of their social networks. Some users, both existing and prospective, can be swayed by the online provider’s capriciousness—and by the provider’s willingness to oust problem users who are disrupting the community. The online provider’s desire to keep these swayable users often can provide enough financial incentives for the online provider to make good choices.

Thus, broadly conceived, § 230(c)(2) removes legal regulation of an online provider’s account termination, making the marketplace the main governance mechanism over an online provider’s choices. Fortunately, the marketplace is effective enough to discipline those choices.

Eric doesn’t talk explicitly here about property rights and transaction costs, but that’s what he’s talking about. Well-worth reading as a short, clear, informative introduction to this extremely important topic.